An extensive literature on venture capital has studied asymmetric information and agency problems between investors and entrepreneurs, examining how separating entrepreneurs from the investor can create frictions that might inhibit the funding of good projects. It has largely abstracted away from the fact that a start-up typically does not have just one investor, but several venture capital investors that come together in a syndicate to finance a venture. This chapter therefore argues for an expansion of the standard perspective to also include frictions within venture capital syndicates. Put differently, what are the frictions that arise from the fact that there is not just one investor for each venture, but several investors with different incentives, objectives, and cash flow rights who nevertheless need to collaborate to help make the venture a success? The chapter outlines the ways in which these coordination frictions manifest themselves, describes the underlying drivers, and documents several contractual solutions used by venture capital firms to mitigate their effects. The chapter’s broader perspective provides several promising avenues for future research.
Is Investment-Cash Flow Sensitivity Caused by Agency Costs or Asymmetric Information? Evidence from the UK